Five things you need to know about the business rates raid

Rebecca Bishop has put sausage rolls priced at £8.17 in the window of Two Magpies, the bakery and pizzeria she runs in Southwold, Suffolk. It is a mild-mannered protest at the huge rise in business rates due in April.

Bishop, 50, said her annual bill was set to jump by almost £10,000 because her shop’s rateable value had gone from £7,200 to £25,500, making her ineligible for small business relief.

“I can’t put my prices up,” she said — a point made by the sausage rolls in the window, which are 177% more expensive than the usual £2.95. “None of these increases in Southwold is going to come from sales. It’s all going to come off the bottom line, so what that means is either retraction or closure.”

Southwold is forecast to be the biggest loser from this year’s revaluation of the controversial £24bn-a-year tax on commercial property. The seaside town’s business rates are on course to rise by about 177% on average, threatening the livelihoods of its many independent shopkeepers. It is a picture that will be replicated in affluent towns and cities, where property values have risen since the last revaluation.

But there will also be winners: commercial tenants in towns where values have fallen. In Merthyr Tydfil, south Wales, the biggest winner, rates are due to fall by 46.5%. Chris Jones, 45, whose family has run the Pet & Garden Centre since 1948, said: “How can it not help? Over the past 10 years, footfall in the town centre has been decreasing. It’s like I’ve been watching my town centre die in front of my eyes.”

The vagaries of the delayed revaluation have brought simmering frustration over the system to the boil. Many hospitals, some nightclubs and universities face steep rises in bills. But Amazon is set for a cut of almost £148,000 a year at its nine centres, according to rating consultancy CVS. Mike Ashley, billionaire founder of Sports Direct, will pay £147,600 less for his Derbyshire warehouse complex.

Mark Rigby, CVS chief executive, said April would be a “hammer blow” to independents. He added: “It will also be interesting to see how bricks-and-mortar shops will compete with agile, online retailers that aren’t battling against exorbitant rent and rates bills for the next five years.”
1 What are business rates?
A tax on places of work dates back to Tudor times, but the business rates system was established in its current form in 1990, when Margaret Thatcher stripped councils of the power to set levies and gave it to the Treasury. It is due to bring in £23.8bn in 2017-18 after £3.8bn of rebates, including £908m in small business relief.

The tax is calculated on the rental value of a property as estimated by the Valuation Office Agency, and is supposed to be recalculated every five years. Unlike other taxes, whose receipts expand and shrink with the economy, business rates are fixed so they are “revenue neutral” to the Treasury. This is achieved through the “multiplier”, which determines what proportion of a property’s value is to be paid in rates. This can be adjusted up at revaluations if values fall, or down if they rise, ensuring the tax take stays the same.

Between five-yearly revaluations, the multiplier tracks the higher of the two main measures of inflation, the retail prices index (RPI), rather than the lower consumer prices index (CPI).

This year it will drop from 49.7p to 47.9p, so a property valued at £20,000 will face a £9,580 bill. But the total rates bill in England will rise by more than 6% in April, the consultancy Gerald Eve said.

BUSINESS RATES: THE NUMBERS

  • 57% the rise faced by John Lewis on London’s Oxford Street and Harrods in Knightsbridge
  • 2020 the date from which councils will be able to keep all the rates generated in their area
  • £19bn the amount that would have been lost in appeals under a proposed rule

2 Why has it been so long since the last revaluation?
It takes two years for the Valuation Office Agency (VOA) to value 1.9m commercial properties, which means that this April’s overhaul reflects the property market in 2015. The last revaluation took place in 2010 using a snapshot of the property market in 2008, before Britain crashed into recession after the financial crisis.

There was supposed to be a revaluation in 2015 using 2013’s property values, but it was postponed by David Cameron and George Osborne, the then prime minister and chancellor. At the time, the government said the delay was designed to give businesses certainty, but the result was that shopkeepers such as Merthyr Tydfil’s Chris Jones were forced to keep on paying inflated business rates based on pre-recessionary property values. (The Welsh government followed the Tories’ lead, but said it was reluctant to do so.)

The government’s claim that only 800,000 sites would have faced increased bills in a 2015 revaluation was disputed by experts, who believed Cameron and Osborne postponed the update to avoid hitting Conservative-voting areas in a general election year.

The delay is part of the reason why this April’s revaluation is due to bring such huge swings in different locations.

The biggest negative impact is set to be felt in affluent market towns and London. On Oxford Street, John Lewis faces a 57% increase in business rates for its flagship department store, while in Knightsbridge, Harrods’ bill will increase by the same amount.

Fabric nightclub in Farringdon is braced for an 18% rise and Ministry of Sound in Elephant & Castle will see its bill increase by 37%.
3 Where does the money go?
The Treasury hands out the proceeds to local councils using a population-based formula. Since 2013, town halls have been able to keep 50% of the business rates they raise above a certain level (set by the government, council by council), although they also have to make good the shortfall if receipts fail to meet that level.


Sausage rolls: an unlikely item used in protest by one small business

By 2020, councils will be able to keep all the rates generated in their area, and they will be able to cut the tax to whatever level they like — in theory allowing those with the appetite to become more competitive to slash their business rates and attract companies. Jerry Schurder, head of business rates at property consultant Gerald Eve, said this was unlikely to happen widely in practice as few would be able to afford the short-term loss of revenue, even if there was a long-term prospect of economic growth. “The main thing it will do is to allow No 11 to deflect criticism of the excessive burden and say ‘it’s nothing to do with us, it’s your local council that sets the rates’,” Schurder said.
4 Isn’t there help for those who are struggling?
For small businesses with one site, the government has doubled the level of relief it provides, exempting properties with a rateable value of less than £12,000 and offering tapered relief up to the £15,000 mark. However, those whose premises move out of the relief zone, such as Rebecca Bishop in Southwold, are instantly hit with full business rates.

The Treasury has put in phasing to prevent property occupiers being clobbered with huge increases overnight. For properties with values of up to £20,000, the maximum rise in the first year is capped at 5%. For those valued at £20,000 to £100,000, the rise is capped at 12.5%, and for those valued at more than £100,000 the cap is 42% — a level so high it is almost meaningless.

Decreases in business rates are also phased, meaning shopkeepers and others in hard-up areas will not enjoy big reductions straight away. For small properties, the maximum decrease in the first year is limited to 20%. For medium properties, the decrease is limited to 10% while for big properties it is limited to a paltry 4.1%.

Jerry Schurder at Gerald Eve said: “Businesses in locations that have struggled to cope with recession have been crying out for reduced rates bills for seven years now, since the last revaluation, and at the point at which they finally see light at the end of the tunnel, the government whips the carpet from under their feet.”

Ratepayers can appeal against their bills, although there is a backlog of about 280,000 cases and the VOA resolved just 64,000 last year, far fewer than its target of 153,000.

A clause inserted into this year’s proposed regulations will allow the government to block appeals, even against incorrect valuations — provided the VOA can show that those valuations are within the “bounds of reasonable professional judgment”. That could give the government a margin of error of 10%-20%. Had the rule been in effect since the last revaluation in 2010, companies would have lost an estimated £1.9bn from marginal appeals.

On Friday, 13 trade bodies wrote a joint letter urging the government to drop the clause, calling it “punitive”. The government labelled their claim “false”.
5 What happens next?
The loudest calls for reform have come from the retail sector, which accounts for about 25p of every pound raised in business rates, and from restaurant and pub operators. Helen Dickinson, head of the British Retail Consortium, said the tax was “no longer fit for purpose in the 21st century” and asked ministers to address the problem “head on”.

Some retailers have called for business rates to be replaced with a VAT-like sales tax to capture the likes of Asos and Amazon, although that would be politically unpopular and would be difficult to apply to industrial and office occupiers, let alone to properties that do not generate sales, such as schools.

Pending a meaningful overhaul, Dickinson urged the government to switch immediately from RPI to the lower CPI as a measure of inflation, and to commit to more regular revaluations from April, not from 2020 as it has promised.

George Osborne’s pledge last year to reform business rates ended in a fudge as he extended small business relief without tackling the main problem. Paul Turner-Mitchell, a business rates campaigner, said the former chancellor’s decision to devolve revenue gathering entirely to local authorities in 2020 would actually make the situation worse.

He said the government needed to consider allowing the amount raised by business rates to fall in the short term “to provide longer-term forms of economic benefit by keeping shops open and driving employment and investment”.

According to the Federation of Small Businesses, 7% of companies pay more in rates than in rent. Local authorities would be “highly unlikely” to consider a rates drop, Turner-Mitchell said, because grant cuts from central government would make them desperate for the income.

David Gauke, chief secretary to the Treasury, last week dampened hopes of a U-turn by chancellor Philip Hammond before April 1. He said: “Far from the picture painted by scaremongering ratings agents, nearly three-quarters of businesses will actually see no change, or even a fall, in their business rates bills.”

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